For-profit hospital chain is in merger talks with parent of Manchester Memorial, Rockville General hospitals

The parent of Manchester Memorial and Rockville General hospitals said Friday it is near a merger agreement with Prospect Medical Holdings, a Los Angeles-based chain that is seeking a greater presence in New England.

Prospect, which owns 13 hospitals in California, Texas and Rhode Island, is also in talks to acquire Waterbury Hospital.

Final details are not complete, Eastern Connecticut Health Network said in a written statement. But both sides have signed a letter of intent to merge — similar to the letter that's now in effect at Waterbury Hospital.

"Prospect would continue ECHN's longstanding commitments of providing health care services and charity care to the wider ECHN community and approach health care with a strong coordination of regional care," said Peter Karl, the ECHN chief executive. "Prospect also has a strong track record of providing high-quality, cost-effective services to the communities it serves."

With the letter of intent, Prospect, a private, for-profit chain, has moved to take over three of the five Connecticut hospitals that had agreed to merge with Tenet Healthcare, a large, Texas-based chain. That deal — which also included Bristol Hospital and St. Mary's in Waterbury — fell apart in December after state regulators proposed conditions that Tenet found unacceptable.

ECHN expects to bring an agreement to a vote of its corporators this summer, the statement said.

Under the agreement, Prospect would make at least $75 million in capital improvements over the next five years, as Tenet had agreed to do. In addition, Prospect's infusion, combined with about $60 million in cash on hand at ECHN, will cover $84 million in debt, about $68 million in pension and other liabilities and an undetermined amount for reserves and a charitable foundation.

The deal is slightly higher than the Tenet offer, an ECHN official said.

The emergence of Prospect was something of a surprise for ECHN, which, earlier this year, set out to find a new merger partner by soliciting four Connecticut-based, nonprofit hospital groups: Yale New Haven Health System, Hartford HealthCare, St. Francis Care and the Western Connecticut Health Network.

There was strong interest from in-state groups, Karl said at the time, but two out-of-state, for-profit chains also came calling.

Prospect appears to be taking a softer stance toward unions than Tenet showed. In a Q&A issued to employees, and in meetings, the company said, "All employees who wish to remain with the hospital will be offered the opportunity to do so, in their current positions" — the identical statement that was issued to employees at Waterbury Hospital last month.

Executives with Prospect declined to elaborate on the statement last month, but it is not an ironclad promise. Prospect could execute layoffs if and when it merges with the Connecticut hospitals. In a note to members, AFT, which represents 700 workers in four bargaining units at ECHN, praised ECHN's collaboration.

Rockville General and Manchester Memorial would keep their brand names, and there are no plans to curtail services, ECHN said.

Small and midsize hospitals are hard-pressed to remain independent for several reasons, including the need to cut costs as the industry consolidates; rising state taxes and declining Medicaid reimbursement rates; and the way Obamacare promises to reward health care delivery — through management of large populations rather than by delivering more medical services.

Those are the same forces driving the wave of mega-mergers at the health insurance and management companies, including Cigna and Aetna. The difference is that the small hospitals truly are too small to stand alone, while the benefits of mergers are less clear for the insurers.

Prospect is among those companies claiming that their business model melds with this new way of thinking about compensation. The chain touts its "unique and innovative health care delivery model that emphasizes coordination of care and population health management, with an emphasis on wellness."

As a for-profit chain converting nonprofit hospitals, Prospect will be subject to special scrutiny. There's reason to believe that the state Department of Public Health, which would have to approve any merger, proposed more onerous conditions on Tenet than it would have proposed for an in-state merger involving a nonprofit group taking over more hospitals.

Many health care experts, as well as Gov. Dannel P. Malloy, suggest that Connecticut's hospitals can't all survive in their present form, with all of their present services, even if they merge into new ownership groups. But if the goal is for the hospitals to continue in something close to their present form, it appears that for-profit takeovers will be part of the mix.

The recent legislative session brought new reforms that require more information to be publicly released but could make the mergers even more difficult. If that's part of the process of accepting for-profit ownership in the Connecticut scene, fine.

"We have been careful and deliberate with our affiliation process," said ECHN's Karl. "We have worked hard to consider the interests and engage all of our constituents in this process, including our patients, employees, medical staff, corporators, the communities we serve and legislative and union leadership."

"We believe Prospect is the best partner for our collective future," he said.